Financial, Institutional and Legal Foundations of Cryptocurrency Functioning in the Modern Economy

Abstract

This paper explores the financial mechanism underlying the functioning of cryptocurrencies as progressive payment instruments within the framework of a transforming digital economy. The study substantiates the relevance of cryptocurrencies in the context of evolving global financial systems, the rapid dissemination of blockchain technologies, and the increasing transaction volumes involving digital assets. The economic essence and functional role of cryptocurrencies are interpreted as a new form of private money, characterized by decentralized issuance, cryptographic security, and operational independence from centralized financial institutions.

The article identifies and systematizes the structural components of the cryptocurrency financial mechanism, highlighting its technological (blockchain infrastructure, mining algorithms, smart contracts), economic (price formation, market exchange, investment utility), and legal (regulatory frameworks, taxation, consumer protection) elements. Various models of cryptocurrency issuance are examined, including Proof-of-Work, Proof-of-Stake, and algorithmic emission, with comparative insights on their operational characteristics and implementation risks. Transaction mechanisms based on decentralized verification and blockchain immutability are analyzed, showcasing their ability to reduce transaction costs, improve cross-border payment efficiency, and enhance transparency.

Special attention is given to stablecoins as a subclass of cryptocurrencies designed to combine the technological advantages of digital assets with the price stability of fiat currencies or commodity reserves. Their relevance as instruments for everyday transactions and international remittances is thoroughly examined. Based on a comparative analysis of international regulatory practices, the article classifies global approaches to cryptocurrency regulation into liberal, balanced, and restrictive models. The paper outlines the evolution of Ukraine’s legal framework for virtual assets, emphasizing the adoption of the Law of Ukraine “On Virtual Assets” and the current gaps in tax treatment and consumer protection.

The study presents the economic and institutional roles of key actors in the cryptocurrency ecosystem—miners, investors, traders, users, developers, and exchanges—and defines the functional relationships among them. Particular focus is placed on cryptocurrencies as settlement tools, assessing their comparative advantages over traditional means of payment, including borderless operation, low transaction fees, irreversible operations, high transaction speeds, and the programmability of smart contracts. Limitations and risks such as volatility, technological scalability, and the lack of legal certainty are also discussed.

The research highlights Ukraine's leading global position in cryptocurrency adoption and identifies key barriers to their integration into the national financial infrastructure. The analysis reveals the necessity for a dedicated tax regime, regulatory sandbox implementation, legal frameworks for stablecoin operation, and strengthening the institutional capacities of supervisory authorities. The potential of central bank digital currencies (CBDCs), particularly the e-hryvnia, is also explored as a strategic response to private cryptocurrencies, combining the benefits of blockchain technology with regulatory accountability and monetary sovereignty.

In conclusion, cryptocurrencies present a transformative potential for the future of the global financial system. However, their successful integration requires the establishment of a coherent and balanced regulatory environment, adapted to national specificities and harmonized with international standards. For Ukraine, the development of a comprehensive financial mechanism for cryptocurrencies, grounded in international best practices and supported by appropriate legislation, may significantly contribute to the modernization of the financial sector and enhance the country’s economic competitiveness in the digital age.